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What Is My Credit Score, and How Is It Calculated?

While your credit reports are simply a track record of your payment history—no judgments—your credit score is more akin to a school GPA. It’s a cumulative number that measures your success relative to others, in this case grading you as a credit-worthy individual.

Lenders typically assign interest rates based on what bracket your score falls into. But credit scores aren’t just used by banks. Increasingly, insurance firms, landlords and even employers are using credit scores as a proxy for figuring out how responsible you are.

The most widely used score, from a company called FICO, ranges from 300 to 850. On the FICO scale, the higher the number, the better. In general, anything over 740 is considered excellent and will qualify you for the best rates: if your score is below 650, you’ll pay very high rates on loans and credit cards, if you qualify for them at all.

Even 20 or so points can make a big difference in what you’ll pay for credit. Someone with a score of 659 could get a 30-year mortgage at 5.3% at today’s rates; if his score was 680 he’d qualify for a loan at just 4.7%. That’s about $950 a year less in interest, or about $28,000 over the life of the loan.

Your credit score is generated based on the information in your credit report. Fair Isaac, the makers of the FICO score, is tight-lipped about exactly how the scores are calculated. But they do give the weights of various criteria that they look at: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used.

The most important factor in determining your score, payment history, is simply a record of whether you’ve paid your bills on time. The second more important, amount owed, is a little more complicated. It looks at how much you’re using of the total credit you have available – also known as your “utilization ratio.” Lenders believe that borrowers who are close to maxing out their credit are more likely to miss payments. The third factor, length of history, is determined by the average age of your accounts, as well as how long it’s been since those accounts were used. The two smallest factors are how often you’ve opened new accounts (opening a bunch at once will hurt your score), and whether you’ve got a mix of different types of credit (such as a mortgage, student loan and car loan). Lenders like to know that you can manage different kinds of accounts responsibly.